“No one teaches Bankruptcy. The only way to learn about Bankruptcy is to experience it.” — Turnaround CEO
No ever expects their company to file for Bankruptcy. When it happens, it can be both shocking and expected at the same time. While Bankruptcy is a well-known term, it is not well understood by the masses.
You see headlines of companies filing for Chapter 11 or Chapter 7. You hear about how student debt is leading to Personal Bankruptcy. However, as I recently learned, you never understand the minutiae until you go through it. In full disclosure, I recently went through the process leading up to Bankruptcy and the initial filing. I didn’t go through the emergence of the company after Bankruptcy, as I chose to leave. So my opinions here will only cover what I experienced.
When you are considering joining a private equity-backed company, and one in a turnaround phase, make sure you have a detailed review of the business’s financials. Explore how the company makes money, what the cash cycle looks like, how much money is available for reinvestment, who the critical debt holders are, how much debt is outstanding, when it matures and, the annual obligations to serve that debt. You can then determine how much profit the company is producing and how much is going back into reinvestment for growth or transformation vs. servicing its debt.
If you are joining as a senior leader or executive, and specifically, if you are going to go under contract with the company, you need to have an employment lawyer review your employment agreement. Second, you need to fully understand the company’s legal structure and how it may impact your contract and ability to execute it. Third, if you can negotiate a clause that gives you the power to trigger the contract, such as in the situation that the company files for Bankruptcy, it gives you more control. Finally, request to interview with at least two board members. In discussions with the board members, you will want to see if you can tease out the board’s culture and how it functions. Be sure to research the executive team and each board member. You will want to go a bit deeper than a basic name search and tie words like “turn around,” “bankruptcy,” “chapter 11”, and “private equity”…
